Community Development Financial Institutions Program; Bank Enterprise Award Program

DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund

12 CFR Parts 1805 and 1806

RIN 1505-AA72

Community Development Financial Institutions Program; Bank

Enterprise Award Program

AGENCY: Community Development Financial Institutions Fund, Department

of the Treasury.

ACTION: Interim rule with request for comment; extension of comment

period.

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SUMMARY: The Department of the Treasury is issuing revisions to the

interim regulations for the Community Development Financial

Institutions (CDFI) Program and the Bank Enterprise Award (BEA) Program

published in the Federal Register on October 19, 1995. The CDFI Program

and BEA Program were authorized by the Community Development Banking

and Financial Institutions Act of 1994. The programs are designed to

facilitate the flow of lending and investment capital into distressed

communities and to individuals who have been unable to take full

advantage of the financial services industry. This action also extends

the comment period on the CDFI Program and BEA Program interim

regulations published on October 19, 1995 to March 15, 1996.

DATES: This interim rule is effective January 23, 1996. Comments on

this interim rule must be received on or before March 15, 1996. The

comment period on the CDFI Program and BEA Program interim regulations

published in the Federal Register on October 19, 1995 is extended from

January 15, 1996 to March 15, 1996.

ADDRESSES: All questions or comments concerning this interim rule and

the October 19, 1995, CDFI Program and BEA Program interim regulations

should be addressed to the Director, Community Development Financial

Institutions Fund, Department of the Treasury, 1500 Pennsylvania Ave.,

N.W., Room 5116, Washington DC 20220.

FOR FURTHER INFORMATION CONTACT: Kirsten S. Moy, Director, Community

Development Financial Institutions Fund at (202) 622-8662. (This is not

a toll free number.)

SUPPLEMENTARY INFORMATION:

I. General

Executive Order (E.O.) 12866

It has been determined that this regulation is not a significant

regulatory action as defined in E.O. 12866.

Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this

interim rule, the provisions of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.) do not apply. Moreover, the Department of the

Treasury finds that any economic or other consequence of this interim

rule are a direct result of the implementation of statutory provisions.

Administrative Procedure Act

Pursuant to the provisions of 5 U.S.C. 553(a)(2), these regulations

are exempt from the proposed rulemaking requirements of 5 U.S.C. 553(b)

and are being issued as interim regulations without opportunity for

notice and public comment prior to their effective date. Furthermore,

the Department for good cause finds that notice and public comment

prior to effect are impracticable and contrary to the public interest.

This interim regulation is intended to amend the interim regulations

for the CDFI Program and BEA Program that were published on October 19,

1995. The purpose of the amendments is to clarify several provisions of

the October 19 interim regulations prior to the application deadline

(January 29, 1996) for both programs. The amendments will also give

applicants greater flexibility in the type of information the Fund will

accept as part of an application--thus, reducing paperwork burden.

Catalog of Federal Financial Assistance Numbers

Community Development Financial Institutions Program--21.020; Bank

Enterprise Award Program--21.021.

II. Background

On October 19, 1995, the Fund published interim regulations in the

Federal Register for the Community Development Financial Institutions

Program (12 CFR part 1805) and the Bank Enterprise Award Program (12

CFR part 1806). Subsequent to the publication of such interim

regulations, the Fund has developed policies to clarify several

provisions in the interim regulations. The technical revisions

contained in this interim rule will provide greater flexibility in the

types of information that may be submitted as part of an application

and thereby reduce the paperwork and regulatory burden for applicants.

The Fund is extending the comment period on the interim regulations

published on October 19, 1995 and these amendments to such interim

regulations to March 15, 1996.

III. Community Development Financial Institutions Program

Under the CDFI Program (12 CFR part 1805), the Fund will provide

financial and technical assistance to selected applicants to engage in

certain community development activities. The following summarizes the

revisions to the regulations.

Subpart A--General Provisions

Section 1805.104(n) is revised to change the definition of the term

``Comprehensive Business Plan'' such that it covers a period of not

less than the next five years--rather than a period of not less than

the next five fiscal years. The revision will provide greater

flexibility to Applicants in the manner in which they can prepare

projections.

Subpart B--Eligibility

Section 1805.201 is revised to clarify that the Fund may revoke a

CDFI certification for good cause.

Subpart F--Matching Funds Requirements

Subpart F of the CDFI Program is revised to clarify two provisions

concerning the use of certain funds for meeting the matching funds

requirements. The revision to Sec. 1805.600 clarifies that private

funds that have been used to satisfy a legal requirement for obtaining

monies from other Federal programs shall not be used to meet the

matching funds requirements of the CDFI Program. In

[[Page 1700]]

addition, a new Sec. 1805.604 clarifies the types of monies the Fund

will consider as retained earnings for the purpose of meeting the

matching funds requirements. As part of the Conference Report to the

Riegle Community Development and Regulatory Improvement Act of 1994

(Report 103-652), Congress expressed its intent that retained earnings

be considered as a source of matching funds. However, given the

diversity of types of institutions that may apply for assistance, the

Fund has sought to clarify the monies that will be considered retained

earnings. This clarification is intended to take into consideration the

capacity of different types of organizations to raise capital from

private sources and focus on sources of income that are earned from an

Applicant's operations. With respect to for-profit and non-profit

(excluding Insured Credit Unions) organizations, the value of grants or

other donated assets will not be considered retained earnings. Except

as specified below, retained earnings that can be used for matching

purposes are limited to those amounts that have been accumulated over

the Applicant's most recent fiscal year or the annual average of

amounts earned over the Applicant's three most recent fiscal years. The

Fund will provide an additional option to Insured Credit Unions because

such institutions face unique barriers in raising capital to enhance

their net worth. As non-profit institutions, Insured Credit Unions

cannot sell stock to raise equity capital. Furthermore, Insured Credit

Unions have historically experienced greater difficulty in obtaining

grants from philanthropic sources than other types of non-profit

institutions. The Fund will permit Insured Credit Unions to use net

capital that has been accumulated within the period described above or

since the inception of the organization. In the latter case, the Fund

will provide that--as part of an Applicant's performance goals--an

Insured Credit Union shall increase its member and/or non-member shares

by an amount that is at least equal to four times the amount of net

capital that is committed as matching funds.

Subpart G--Applications for Assistance

Revised Sec. 1805.701(d)(2)(iii) modifies the application

requirements to provide greater flexibility in forms of historic and

projected financial statements that the Fund will accept. In

Sec. 1805.701(e)(3), Insured Credit Unions that seek to use retained

earnings as matching funds are now permitted to substitute certain

information submitted to the National Credit Union Administration in

lieu of tax returns.

IV. Bank Enterprise Award Program

Under the BEA Program (12 CFR part 1806), the Fund will provide

awards to selected Applicants that successfully carry out certain

community development activities. The following summarizes the

amendments to the interim regulations.

Subpart A--General Provisions

Definitions

The term ``Investment'' is added to Sec. 1806.103 to describe the

activities covered by this revision. An ``Investment'' (other than an

Equity Investment in a CDFI) shall be considered to be the purchase of

stock, a limited partnership interest, or another ownership instrument,

or a grant provided by an Applicant or its Subsidiary in a commercial

real estate, single family housing, multi-family housing, business or

agriculture project or activity.

Subpart B--Awards

Community Designation

Section 1806.200 of these Bank Enterprise Award (BEA) Program

interim regulations clarifies that if a Distressed Community is

composed of census tracts, an Applicant may submit estimates of

unemployment using the U.S. Bureau of Labor Statistics' ``Census

Share'' calculation method. An Applicant interested in using the Census

Share method should contact the Fund to obtain instructions for such

calculations.

Application Requirements

Section 1806.201 is revised to permit an Applicant to report

investments (other than Equity Investments in a CDFI) in specific

projects or activities as part of its Eligible Development Activities.

Such investment activities should be reported on the application forms

in the same category of Eligible Development Activity described in

Sec. 1806.201(b)(4) that most closely describes the subject investment

activity (e.g. an investment in a multi-family housing project should

be reported under ``Multi-Family Loans.'').

Section 1806.202 is modified to clarify the manner in which the

Fund will assess the value of an Investment. An Investment will be

valued at the original amount of the purchase of stock, limited

partnership interest, or other ownership interest, or grant.

In response to numerous questions raised by potential Applicants,

the Fund seeks to clarify that Sec. 1806.201(b)(4)(viii) requires an

Applicant to report the amount of funds that are deposited by Residents

of a Distressed Community at offices located within the Distressed

Community. However, the Fund has determined that this will create an

undue burden for many Applicants. For this reason, these interim

regulations give Applicants the option of not reporting information on

its deposit liabilities. In such a case, an Applicant's deposit

liabilities will not be considered (either positively or negatively) in

calculating the service score as described in Sec. 1806.203(b)(1).

Section 1806.202 is also modified to clarify the manner in which

deposit liabilities will be measured. Deposit liabilities shall be

measured by comparing the net change in the amount of applicable funds

on deposit between the beginning and end of the Baseline Period and the

beginning and end of the Assessment Period.

Section 1806.204 is amended to clarify the manner in which an

Applicant should present its application materials if it is merging

with another institution during the Assessment Period. In summary, the

Applicant (which should be the surviving institution) shall submit

materials for it and the institution with which it is merging that

describe the Baseline Period activities of each institution. The

Applicant shall submit a combined projection of Assessment Period

activities of the merged institutions.

Section 1806.206(b)(4) is modified to recognize that some

Applicants may be unable to make firm commitments to provide Equity

Investments to specific CDFIs prior to the application deadline. In

lieu of the requirements described in Sec. 1806.206(b)(4) (which

indicate that an Applicant must identify the specific CDFI in which it

will invest and the terms and conditions of such investment), the Fund

will permit an Applicant to submit: (1) A projection of the total

dollar amount of Equity Investments in CDFIs that it expects to make

during the Assessment Period; (2) a list of potential investees; and

(3) its criteria for making investments.

V. Extension of Comment Period

The Fund hereby extends the deadline for the comment period on the

interim regulations published on October 19, 1995 for the CDFI Program

and BEA Program until March 15, 1996. The Fund strongly encourages all

applicants and other interested parties to submit comments.

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List of Subjects

12 CFR Part 1805

Banks, banking, Community development, Economic development, Grant

programs--community development, Loan programs--community development,

Small businesses.

12 CFR Part 1806

Banks, banking, Community development, Economic development, Grant

programs--community development, Loan programs--community development,

Savings associations, Small businesses.

For the reasons set forth in the preamble, Parts 1805 and 1806 of

Chapter XVIII of Title 12 of the Code of Federal Regulations are

amended as follows:

PART 1805--COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS PROGRAM

1. The authority citation for Part 1805 continues to read as

follows:

Authority: 12 U.S.C. 4703, 4717; chapter X, Pub. L. 104-19, 109

Stat. 237 (12 U.S.C. 4703 note).

2. Section 1805.104(n) is revised to read as follows:

Sec. 1805.104 Definitions.

* * * * *

(n) Comprehensive Business Plan means a document covering not less

than the next five years which meets the requirements described under

Sec. 1805.701(d);

* * * * *

3. Section 1805.201 is amended by adding a new sentence at the end

of the section to read as follows:

Sec. 1805.201 Certification as a Community Development Financial

Institution.

* * * The Fund, at its sole discretion, retains the right to revoke

a certification for good cause.

4. Section 1806.600 is amended by adding after the second sentence

a new sentence to read as follows:

Sec. 1805.600 Matching funds--general.

* * * Funds that have been used to satisfy a legal requirement for

obtaining funds under another Federal grant or award program cannot be

used to satisfy the matching requirements described in this section. *

* *

5. Section 1805.604 is added to subpart F to read as follows:

Sec. 1805.604 Retained earnings.

(a) An Applicant that proposes to meet all or a portion of its

matching funds requirements as set forth in this part by committing

available earnings retained from its operations pursuant to

Sec. 1805.601(c) shall be subject to the restrictions described in this

section.

(b)(1) In the case of a for-profit Applicant, retained earnings

that can be used for matching funds purposes shall consist of:

(i) The increase in retained earnings (excluding the after-tax

value to an Applicant of any grants and other donated assets) that has

occurred over the Applicant's most recent fiscal year (e.g., retained

earnings at the end of fiscal year 1995 less retained earnings at the

end of fiscal year 1994); or

(ii) The annual average of such increases that have occurred over

the Applicant's three most recent fiscal years.

(2) Such retained earnings can be used to match a request for an

equity investment. The terms and conditions of financial assistance

will be determined by the Fund.

(c)(1) In the case of a non-profit Applicant (other than an Insured

Credit Union), retained earnings that can be used for matching funds

purposes shall consist of:

(i) The increase in an Applicant's fund balance (excluding the

amount of any grants and value of other donated assets) that has

occurred over the Applicant's most recent fiscal year; or

(ii) The annual average increases in an Applicant's fund balance

that has occurred over the Applicant's three most recent fiscal years.

(2) Such retained earnings can be used to match a request for a

capital grant. The terms and conditions of financial assistance will be

determined by the Fund.

(d)(1) In the case of an Insured Credit Union Applicant, retained

earnings that can be used for matching funds purposes shall consist of:

(i) The increase in net capital that has occurred over the

Applicant's most recent fiscal year;

(ii) The annual average of increases in net capital that has

occurred over the Applicant's three most recent fiscal years; or

(iii) The entire net capital that has been accumulated since the

inception of the Applicant provided that the conditions described in

paragraph (d)(4) of this section are satisfied.

(2) For the purpose of paragraph (d)(4) of this section, net

capital shall be comprised of ``Regular Reserves'', ``Other Reserves''

(excluding reserves specifically dedicated for losses), and ``Undivided

Earnings'' as such terms are used in the National Credit Union

Administration's accounting manual.

(3) Such retained earnings can be used to match a request for a

capital grant. The terms and conditions of financial assistance will be

determined by the Fund.

(4) If the option described in paragraph (d)(1)(iii) of this

section is used:

(i) An Applicant's performance goals described in Sec. 1805.901(a)

shall provide that:

(A) An Awardee increase its member and/or non-member shares by an

amount that is at least equal to four times the amount of net capital

that is committed as matching funds;

(B) Such increase be achieved within one year of entering into an

Assistance Agreement; and

(C) Such increase be maintained for the period of time covered by

the Comprehensive Business Plan;

(ii) The Applicant's Comprehensive Business Plan shall discuss its

strategy for raising the required shares and the activities associated

with such increased shares;

(iii) The level from which the increases in shares described in

paragraph (d)(4)(i) of this section will be measured shall be the

greater of the level of shares as of:

(A) The end of the calendar year immediately preceding the

applicable application deadline; or

(B) The time that an Applicant is selected to receive assistance;

and

(iv) Financial assistance shall be disbursed by the Fund only as

the amount of shares described in paragraph (d)(4)(i)(A) of this

section is increased.

(5) The Fund will allow an Applicant to utilize the option

described in paragraph (d)(1)(iii) of this section for matching funds

only if it determines, in its sole discretion, that the Applicant will

have a high probability of success in increasing its shares to the

specified amounts.

(e) An Applicant may only use retained earnings to meet the

matching funds requirements if it has liquidity (as determined by the

Fund) in amounts that are equal to or greater than the amount of

retained earnings that is proposed for use as matching funds. In

assessing an Applicant's liquidity for the purposes of this paragraph

(e), the Fund may exclude any amounts that it determines are not

available to promote an Awardee's performance goals and the purposes of

the CDFI Program.

(f) Retained earnings accumulated after the end of the Applicants

most recent fiscal year ending prior to the appropriate application

deadline may not be used as matching funds.

6. Section 1805.701 is amended by revising paragraph (d)(2)(iii)

and the

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first sentence of paragraph (e)(3) introductory text to read as

follows:

Sec. 1805.701 Application contents.

* * * * *

(d) * * *

(2) * * *

(iii) Financial statements. (A) An Applicant shall submit:

(1) Audited financial statements;

(2) Financial statements that have been reviewed by a certified

public accountant; or

(3) Financial statements that have been reviewed by the Applicant's

Appropriate Federal Banking Agency.

(B) All financial statements must utilize accrual based accounting

methods. All historic financial statements shall be reported on the

basis of the Applicant's fiscal year.

* * * * *

(e) * * *

(3) If an Applicant intends to use retained earnings to meet the

matching funds requirements, it shall provide the information described

in paragraph (d)(2)(iii) of this section and a copy of its tax returns

for the same period, or, in the case of an Insured Credit Union, a copy

of its most recent Form 5300 that has been submitted to the National

Credit Union Administration. * * *

* * * * *

PART 1806--BANK ENTERPRISE AWARD PROGRAM

1. The authority citation for Part 1806 continues to read as

follows:

Authority: 12 U.S.C. 4703, 4717; chapter X, Pub. L. 104-19, 109

Stat. 237 (12 U.S.C. 4703 note).

2. Section 1806.103 is amended by adding a new paragraph (dd) to

read as follows:

Sec. 1806.103 Definitions.

* * * * *

(dd) Investment means, for the purpose of Sec. 1806.201(b)(4)(xiv),

the purchase of stock, limited partnership interest, or other ownership

instrument, or a grant in a commercial real estate, single family

housing, multi-family housing, business or agriculture project or

activity.

3. Section 1806.200(b)(2)(ii) is revised to read as follows:

Sec. 1806.200 Community eligibility and designation.

* * * * *

(b) * * *

(2) * * *

(ii) The unemployment rate is at least 1.5 times greater than the

national average, as determined by the U.S. Bureau of Labor Statistics'

most recent data (including estimates of census tract unemployment

developed using the Bureau of Labor Statistics' Census Share

calculation method).

* * * * *

4. Section 1806.201 is amended by revising paragraph (b)(2),

removing ``and'' at the end of paragraph (b)(4)(xii), removing the

period at the end of paragraph (b)(4)(xiii)(B) and adding in its place

``; and'', and adding a new paragraph (b)(4)(xiv) to read as follows:

Sec. 1806.201 Qualified activities.

* * * * *

(b) * * *

(2) Service. The Eligible Development Activities listed in

paragraphs (b)(4)(i) through (vii) and (b)(4)(xiv) of this section must

serve a Distressed Community. An activity is considered to serve a

Distressed Community if it is:

(i) Undertaken in the Distressed Community; or

(ii) Provided to Low and Moderate Income Residents or enterprises

integrally involved in the Distressed Community.

* * * * *

(4) * * *

(xiv) Investments (the same priority factor and reported in the

category of Eligible Development Activity described in paragraphs

(b)(4)(ii) through (vii) of this section that most accurately describes

the type project or activity in which an Investment is made (e.g., an

Investment in a multi-family housing project should be reported under

Multi-family Loans)).

5. Section 1806.202 is amended by revising paragraph (a), removing

``and'' at the end of paragraph (d)(2), removing the period at the end

of paragraph (d)(3) and adding ``; and'' in its place, and adding new

paragraphs (b)(4) and (d) to read as follows:

Sec. 1806.202 Measuring activities.

(a) General. Qualified Activities shall be measured by comparing

the Qualified Activities carried out during the Baseline Period with

the Qualified Activities projected to be carried out during the

Assessment Period. Increases in the values of Qualified Activities

between the Baseline and Assessment Periods will be used in determining

award amounts. Applicants shall report their activities in all

categories of Qualified Activities for the Baseline and Assessment

Periods. At its option, an Applicant may select not to report its

deposit liabilities as described in Sec. 1806.201(b)(4)(viii). In such

a case, an Applicant's deposit liabilities will not be considered in

calculating the service score pursuant to Sec. 1806.203(b)(1). The

dates of the Baseline and Assessment Periods will be published in the

NOFA for each funding round.

(b) * * *

(4) Investments at the original amount of the purchase of stock,

limited partnership interest, other ownership interest, or grant.

* * * * *

(d) Deposit liabilities. (1) Deposit liabilities shall be measured

by comparing the net change in the amount of applicable funds (as

described in Sec. 1806.201(b)(4)(viii)) on deposit at the Applicant

institution during the periods described in paragraphs (d)(2) and

(d)(3) of this section.

(2) An Applicant shall measure the net change in deposit

liabilities during the Baseline Period by comparing the amount of

applicable funds on deposit at the close of business the day before the

beginning of the Baseline Period and at the close of business on the

last day of the Baseline Period.

(3) An Applicant shall measure the net change in deposit

liabilities during the Assessment Period by comparing the amount of

applicable funds on deposit at the close of business the day before the

beginning of the Assessment Period and at the close of business on the

last day of the Assessment Period.

7. Section 1806.206 is amended by revising paragraphs (b)(1) and

(b)(4) to read as follows:

Sec. 1806.206 Applications for Bank Enterprise Awards.

* * * * *

(b) * * *

(1) A completed Bank Enterprise Award Rating and Calculation

worksheet (If an Applicant intends to complete a merger with another

institution during the Assessment Period, it shall submit a separate

Baseline Period worksheet for each subject institution and one

Assessment Period worksheet that represents the projected activities of

the merged institutions. If such a merger is unexpectedly delayed

beyond the end of the Assessment Period, the Fund reserves the right to

withhold distribution of an award until the merger has been

completed.);

* * * * *

(4) If applicable:

(i) A narrative description of each CDFI that the Applicant

proposes to provide an Equity Investment in and the amount, terms, and

conditions of the investment; or

(ii)(A) A projection of the aggregate dollar amount of Equity

Investments it proposes to make during the Assessment Period;

(B) A list of potential investees; and

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(C) A description of its investment criteria;

* * * * *

Dated: January 17, 1996.

Kirsten S. Moy,

Director, Community Development Financial Institution Fund.

[FR Doc. 96-745 Filed 1-22-96; 8:45 am]

BILLING CODE 4810-70-P